3 Common Mistakes to Avoid with Financial Projections for a Business Plan

Michael Sheridan, COO of Docstoc (http://www.docstoc.com/) takes a look at financial projections in relation to your business plan. In this talk, he outlines the 3 most common mistakes to avoid when making these projections.

  1. Having overly conservative financial projections
  2. Being too aggressive with your projections
  3. Providing estimates without proof to back up your projections

I’ve seen a lot of business plans and a lot of financial models and there’s three common mistakes that I see either in the model or as people are talking about the model. They’re either too conservative, too aggressive or they really have no idea how they got to their estimates. So when people are being too conservative, one of the first things they’ll say is these financials are really too – overly conservative as estimates.

And what everybody hears is you have no idea what you business is essentially supposed to be making so when you’re doing this, try not to be too conservative in focusing on what’s realistic.

The second piece ties right into that – being too aggressive. When you’re too aggressive in your model and thinking about how you’re going to make revenue by getting 10% of the whole world spending on this, it’s nearly impossible. Make sure as you do your model that you’re focusing on what’s truly realistic to achieve from a sales perspective and also from an expense line item.

And the last piece is simple. It’s all making sure of avoiding unsubstantiated estimates. And when we’re talking about these estimates, it’s about going out and having a proof point and reasons for how you got to the expense line items as well as the sale and revenue projections that you have.

So these three common mistakes – being too conservative, too aggressive and not clearly stating what is important when you’re doing these estimates are key pieces you want to focus on when creating your financial model.